Cost Management:
Issues of Quality
ACCT7320, C. Bailey
Quality as a Competitive
Weapon
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TQM a key issue of the 1990’s-Present
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high costs associated with quality--15-20% in
many organizations.
Baldrige Quality Award
ISO 9000 and ISO 14000
Conceptual linkage between Quality and
Profitability (Exhibit 17.1—see next slide)
Exhibit 17.1
17-3
What is quality?
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Quality Definitions
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fitness for use
degree to which a product satisfies customer
wants
conformance to design specifications
Conformance Quality; Design Quality
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Next slide…
Meeting the customer’s needs
Two Aspects of Quality
Actual
Performance
Design
Specifications
Conformance
Quality
Failure
Customer
Requirements
Quality
of Design
Failure
Costs of Quality
The cost incurred to prevent, or the costs
arising as a result of, a low-quality
product.
Traditional Categories
•
•
•
•
Prevention
Appraisal
Internal failure
External failure
Prevention Cost
…incurred to preclude the production of
products/ services that do not conform to
specifications.
Areas for consideration:
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Design Engineering
Process Engineering
Supplier evaluations
Preventive equipment maintenance
Quality training
New materials used to manufacture products
Appraisal Cost
…..incurred to detect which of the individual
units of products do not conform to specs.
Areas for consideration:
•
•
•
Inspection
Online product manufacturing & process inspection
Product testing
Internal failure costs
…..incurred on a defective products
before it is shipped to customers.
Areas for consideration:
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Spoilage
Rework
Scrap
Breakdown maintenance
Manufacturing/process engineering on
internal failure
Opportunity costs
External failure costs
…..incurred on a defective products after it is
shipped to customers.
Areas for consideration:
•
•
•
•
•
Customer support
Manufacturing/process engineering for external
failures
Warranty repair costs
Liability claims
Opportunity costs
Cost of Quality Report
Evaluating Quality
Performance
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Advantages of Costs of Quality
Measures
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Focus attention on how costly poor quality
is.
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Estimate benefits of different qualityimprovement programs; setting priorities for
cost reduction.
Help evaluate trade-offs among prevention and
failure costs.
Evaluating Quality Performance, Cont’d.
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Advantages of Nonfinancial Measures
Often easy to quantify and to understand.
 Direct attention to physical processes
 Provide immediate feedback on whether
efforts have succeeded in improving quality.
A balanced scorecard combines financial and
nonfinancial measures so management can
evaluate trade-offs between areas of
improvement.
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Cost Of Quality: Traditional View
Costs
Total
Costs
Prevention &
Appraisal)
Internal &
External
Failure)
Lowest
Quality
Point of
“enough quality”
Highest
Quality
Problems with the Traditional View
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Accountants do not traditionally
measure some important costs
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Opportunity costs
Cost to reduce failure may be lower
than thought
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Deming’s principles
Cost Of Quality: Revised
Failure more expensive, P & A Less Costly than believed
Costs
Total
Costs
Prevention &
Appraisal)
Internal &
External
Failure)
Lowest
Quality
New point of
“enough quality”
Highest
Quality
End of Presentation